Reaction to Greek Deal

Supporters from the Independent Greeks party hold Greek flags as Presidential guards performs the changing of the guards ceremony outside the Greek parliament in November.

Second time lucky — for this round of talks at least: we have a deal for Greece that will allow it to receive about €44 billion ($51.7 billion) to be paid in three installments early next year, assuming Greece sticks to continuing austerity measures.

The deal also trims Greece’s debt, through a mix of interest-rate cuts on loans to Athens, a buyback of Greek debt at sharply discounted prices, and the European Central Bank returning profits linked to its holdings of Greek bonds to the Greek government.

Reactions in the market so far reflect relief that some kind of deal has been struck, but doubts that any market rallies can last, concerns that it does nothing for euro-zone growth, and a sense of bafflement over the details. Why haggle so intensely over debt-to-GDP ratios for 2020 when no-one really knows precise details on how Greek GDP is likely to shape up in 2013?

Here’s a selection of views from analysts and investors.

PIMCO: “If at all, it’s a relief, but actually it’s as much as people would have expected. It’s definitely not a game changer,” says Thomas Kressin, who heads currency strategy for PIMCO in Munich. “There is some initial sort of relief rally in the market today but we should not expect too much of an extension of that, because everyone anticipated this deal would be reached. What we have to conclude after all is that this is another kick down the road attempt because these measures are hardly enough to resolve Greece’s problems.”

JPMORGAN: Economist David Mackie says this deal “just about keeps the show on the road for Greece” but it doesn’t end the near-term fiscal burden for the country. And it looks like further official support will be needed in future. The bank notes that the Eurogroup explicitly states that further measures will be forthcoming if necessary.

SCHRODERS: Clive Dennis, head of currencies at the asset management company, says an agreement on Greece had been expected by Schroders and by the market more generally, as can be seen by the continued repricing of Greek debt and equities in recent weeks and indeed months. “While it is good news that the deal has been completed, there is, I believe, limited scope for the euro to rally on this news alone,” he says.

BLUEBAY ASSET MANAGEMENT: “While this deal takes Greek risk off the table in the short term, I expect the troubles in Greece to flare up again by the end of 1Q 2013,” says senior fixed-income portfolio manager Mark Dowding. On the Greek debt buyback, he adds: “I’m not sure if this buyback is particularly appealing. Normally, investors would be offered a premium on their holdings to get involved in any such operation. The prices in the secondary market are already at or slightly above the ‘expected’ buyback levels.”

SLJ MACRO PARTNERS: “The question now is whether the people of Greece absorb these harsh measures,” says co-founder Stephen Jen. “If they don’t, if that link is broken, then Germany can’t help it even if it wants to. The focus now will very much be on internal Greek politics,” he says.

UBS: The muted reaction in currency markets so far shows that Spain, not Greece, is really the country troubling investors, says currencies analyst Geoffrey Yu. “A really good risk rally will really depend on what happens with Spain,” he says.

MAREX SPECTRON: The Greek saga is not at an end. “The bottom line is that a long-term accounting trick will allow Greece to avoid default. Nothing more, nothing less. Don’t imagine for a second that we have heard the end of this saga. Read IMF chief Lagarde’s comments–she does not seem to be convinced…yet.”

JEFFERIES BACHE: “I’m not sure it’s a huge surprise,” says head of FX strategy Jonathan Webb. “They had to make some concessions to the IMF as part of the credibility of the program revolves around the IMF’s involvement,” he says. “Greece is a bit of a sideshow with respect to the prospects for Europe. The issues are revolving much more around Spain and growth in the core.”

CITIGROUP: Economists still see a 60% chance of Greece leaving the euro over the next year or two. Although the probability of Greece leaving in the very near-term has fallen, there is no sign that euro-zone credit countries, such as Germany, “are willing to restructure Greek debt enough or moderate the required fiscal tightening [which would require additional funding] enough to allow the Greek economy some breathing room to recover,” says the bank.

HSBC: “The market was always going to like it because at least it hasn’t been delayed again,” says currencies analyst Daragh Maher. “I don’t think anyone expects this to be the last iteration in the process, and it’s no comfort that it took a lot of head-bashing to get what we got.”

SOCIETE GENERALE: Chief currencies strategist Kit Juckes describes this as a “new can-kicking world record.” Don’t expect the positive afterglow to last, he says. “Today’s optimistic mood will in due course be reversed unless someone comes along with a magic growth potion.”

RBC CAPITAL MARKETS: What about other bailout countries, the bank wonders. “In our view, this agreement is substantial and should significantly improve Greece’s fiscal position,” it says. “It does, however, raise many questions, one of which is what will be the position of the other bailout economies (Portugal and Ireland) which would, presumably, also care to see lower rates etc on their deals–that may therefore surface as an issue over the next few weeks.”

DEUTSCHE BANK: Any wrinkles in the conditions of the Greek debt buyback should not scupper the deal, says economist Mark Wall. “We would be surprised if having come this far the Eurogroup would deny support for Greece on the back of a low participation in a bond exchange,” he says.

BARING ASSET MANAGEMENT: “This isn’t the end of the story for Greece… things will probably flare up there again next year,” says Dagmar Dvorak, an investment manager for fixed income and currencies. “The (Greek) news is a relief but it’s not a massive game changer. There are still a lot of uncertainties around in the foreign-exchange market globally… I think the euro will remain weak which would help the European economy recovery quicker.”

Comments (1 of 1)

I keep reading that Germany fears "contagion" and that this is why they are willing to fund Greece. But there is more than variety of contagion. A Greek exit could lead to further exits, but funding Greece has already led to funding Ireland ad Spain. How far will this process go?